Saturday, November 27, 2010

Does monthly net mortgage lending affect house price changes?

Why weak lending points to lower UK house prices

A couple of days ago, I promised Jack C and others to compile something on this. My first Google hit was s fine article in Money Week which has already prepared the chart, showing that from 1995 to 2007 the two went more or less in line. Since then, net mortgage lending has slumped to more or less £nil, but house prices appear to be "defying gravity".

Posted by mark wadsworth @ 12:00 PM (2597 views)
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23 thoughts on “Does monthly net mortgage lending affect house price changes?

  • sibley's b'stard child says:

    Great find MW; that chart is something else. Even the pseudo crash of ’08-’09 would have been a proper HPC had it followed trend. I guess we know what’ll happen next – weeeeeeeeeeee!

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  • So whats holding them up? Is it the employment level to low or repo’s not happening, stubborness in the sellers, combo of all ! Who knows, i’m sure we are in for a big leg down soon though….

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  • This is just the bubble at work – net lending follows house prices upwards because (a) houses are seen as a good investment and (b) the extra borrowed money pushes prices up..(repeat a & b). But although the money tap has now been turned off, there’s still no downward pressure on prices because credit is cheap but in short supply. (That doesn’t really make sense does it?) Unless people try and sell in large numbers, prices will continue to defy gravity I think.

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  • Mortgage interest rates are still well below historical average. Even the Halifax pushing up SVR for new lenders (effective from January) keeps rates low on a historical basis.

    For many sellers in my bit of Essex, the lack of lending (and therefore enabled buyers) means they are swayed towards renting out their properties “till things go back to normal”. My view is that “normal” will be a drop of around 10-12%, however.

    Unless IRs rise, I can only see a slow decline in prices.

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  • The Tories raised rates back in the 80’s and maybe they’ll do that again – “if it’s not hurting it’s not working” as I remember John Major saying.

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  • Moneyweek have been saying that house prices were going down by 40-50% for many years. They also said that IRs would go through the roof.
    I wish I hadn’t believed them.

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  • Re: Moneyweek – they were correct about gold 😉

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  • Interesting find, MW.

    Does anybody know if the ‘shared equity’ thing happened during the 90s? I am finding that more and more of the lower end property advertisements on Rightmove are shared equity offers. Might this be part of the reason that prices are still lofty?

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  • I’ve bought a place.

    The reason is not because I think its a good investment, its somewhere to live. The other thing is that I think savers will continue to bail out the indebted.

    The Bank of England has tacitly abandoned its inflation target. This is the greatest and most serious betrayal of trust of the prudent in living memory I believe – the Bank of England has become the source of the moral hazard rather than the resolver.

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  • tenyearstogetmymoneyback says:

    quiet guy

    I would have thought shared equity would pull the price down rather than up.
    Typical figures are 90% of “normal prices” but you are only get 80% ownership.

    I saw one place on Rightmove which looked to be a bargain. Then read you only get a Lifetime tenancy
    as opposed to owning it.

    p.s Shared equity was a complete disaster in the 80s. People found themselves with houses that weren’t
    worth what they paid AND still owed another 20% to the builder. There was a Panorama program about it
    in which they went down the road where a colleague lived in Bradley Stoke, Bristol, locally known as Sadly Broke
    for most of the 1990s.

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  • tenyearstogetmymoneyback says:

    paul

    Good luck. Put in an offer on a place today so will have to wait and see what happens.
    In my case it is a 30% rent increase tipping me over the edge.

    I was asking yesterday for any negotiating tips. You sound as if you might have some.

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  • @tenyearstogetmymoneyback

    I’m guessing that we look at different types of property market. I often see shared equity advertised at about 50% of ‘market price’ and sometimes even less! This suggests to me that there isn’t enough money out there for the builder to sell at the price they think is right. It’s getting oi the point now where half or advertisements at the low end of the market are shared equity which is a real pain when you’re trying to get a feel for actual prices.

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  • mark wadsworth says:

    Cyril @ 3, your explanation makes sense to me. It’s just psychology and low interest rates keeping them up. If you own a house and your mortgage costs you next to nothing (or you’ve paid it off) and you’ve decided that your house is worth £200,000 and you won’t sell it for a penny less than that, the simple fact that most FTBs can’t afford to pay more than £150,000 is completely irrelevant. You’ll wait until some nutter comes along who offers £200,000.

    The point is, there is not really a supply and demand curve for housing. Supply is fixed, owner-occupiers are simultaneously suppliers and consumers, so what is important is the owner-occupier’s (i.e. supplier’s) own demand curve. If he can continue to inhabit a nice place for a monthly outlay of £200 and a FTB would have to (but can’t afford to) incur a monthly mortgage payment of £1,000 to take on the mortgage to pay the price that the ‘supplier’ is expecting, clearly, very few sales will happen.

    So then if you plot demand against selling price and ignore monthly outlays, the ‘demand’ curve of owner-occupiers is much, much higher than the demand curve for FTBs, so owner-occupiers will always out-bid FTBs (by simply staying put).

    Or imagine that food supply was deliberately restricted and was rationed, and a privileged majority were allowed to buy one week’s ration of food for a low price, and the ‘priced out generation’ get no ration vouchers and have to buy food from the privileged majority (who themselves only get just enough food to eat, if we ignore second home owners). The prices that the POG would have to offer would be very high indeed.

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  • 14 MW Agree with your diagnosis. Therefore, if people dont have to move house the market is dependent on people who have to move for ‘event’ reasons.

    The key events being: Divorce, death, dramatic increase in costs, loss of income or some major event that triggers off a mood change in the general public, that then escalates like a snowball through the media. Death and divorce are fairly consistent, the cost of borrowing is low, but will creep up. The employment rate isnt as bad as it could be because of quantitive easing, but government cuts will cause different regions to be effected, with London being fairly immune. Therefore, its going to come down to a major event. The most likely major event at the moment seems that the pass the parcel of the banking crisis will eventually implode. But where will it land: Ireland? Belgium, Spain , Portugal or the UK? Or will it be a case that China and the the USA decouple sending shockwaves through the system.

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  • tenyearstogetmymoneyback says:

    quiet guy @13.

    Where abouts are you. For info my location is BH23.

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  • @ paul,
    “The Bank of England has tacitly abandoned its inflation target. This is the greatest and most serious betrayal of trust of the prudent in living memory I believe – the Bank of England has become the source of the moral hazard rather than the resolver”. The MPC is working for Vested Interests, mainly banking. It’s the world we live in…

    Hope the house situation works out – savers are getting a raw deal, right now. No assistance in building up funds.

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  • Excellent video @6.

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  • Why are people buying something that is widely tipped to fall in value…? Even if you’re not getting any interest on your savings, at least it’s not losing value. (And before anyone says ‘inflation’, the value of cash is what you can buy with it, so if you are saving for living costs in your old age, then sure, it’s falling in value, but if you’re saving for a house, your savings are rising in value as house prices fall..)

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  • Yeah, good video.

    Y2k prices – if only.

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  • Paul – i hope you didn’t buy off a baby boomer to enable them to supplement their obscene pension by downsizing????

    Good luck with it.

    http://streamstudio.world-television.com/CCUIv3/frameset.aspx?ticket=117-118-9028&browser=ns-0-10-0-0-0&target=en-default-&status=ondemand&stream=rm-audio-28

    food for thought

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  • MW – thanks for your efforts – I’ll save this one into my favourites.

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